Boring? Maybe. Simple? Fairly. Effective? Absolutely, it can be.

Here, in five steps, is how someone with a spare £10,000 to invest could use that approach to generate regular passive income. Actually the approach could still work with less than that, though the income would be smaller.

1. Get ready to buy

The first step is a simple one: putting the £10k into an account that can be used to buy shares.

There are lots of options, from a share-dealing account to a Stocks and Shares ISA or share-dealing app.

2. Learn, learn some more, and keep learning

Next is getting to grips with what the stock market is all about.

For example, just because a business does brilliantly does not necessarily mean its shares will do well. They could be overvalued and move down in price even though profits rise, for example.

Learning about key concepts from valuation to risk management is a vital step for investors.

3. Build a portfolio

At some point, the investor can then start buying shares. With £10,000, they have enough to let them diversify across different companies, helping to reduce risk if one of them disappoints. Dividends are never guaranteed, so today’s passive income provider could dry up tomorrow.

That said, there are some things to look out for when choosing shares to buy.

For example, one share I own is Income and Growth Venture Capital Trust (LSE: IGV).

It aims to pay a minimum dividend per share each year. That is just a goal: there is no guarantee it will be achieved, although the trust does have an impressive track record in recent years.

So I look to the source of dividends.

In this case, the business model is about investing in small and medium-sized companies with the hope at least some of them will grow in value. Selling those stakes (or receiving dividends from the businesses) can help Income and Growth Venture Capital generate cash to fund its dividends.

With an uncertain economic outlook threatening growth prospects, I see a risk that smaller companies could struggle, hurting the trust’s cash flows.

But I am optimistic the trust managers’ proven ability to select promising companies will help it perform well over the long term.

I may be wrong of course. Again, that helps explain why I diversify.

4. Let the money roll in

Next, an investor could sit back and watch as their passive income streams kick in.

With the FTSE 100 yielding an average 3.4% at the moment, that could be around £340 per year.

Many shares have a higher yield, though, so a carefully chosen portfolio could perhaps deliver more while still managing risks closely.

5. Manage, without micro-managing

At that point, an investor could choose to do no more beyond receiving dividends.

But the investment case for a business can change – dividends can grow, but they can also fall or be cancelled altogether.

So, while too much action can hurt returns, so can inaction. A smart investor will at least keep an eye on their portfolio from time to time to see whether any adjustments are necessary.

The post 5 steps to building monthly passive income with a spare £10k appeared first on The Motley Fool UK.

I do that myself. One of the shares I own as part of my passive income plan sells for pennies.

Penny share with powerful income potential

The share in question is Income and Growth Venture Capital Trust (LSE: IGV).

Like it says on the tin, it is a venture capital trust. So it invests in small and medium-sized businesses it reckons have good growth potential.

When it comes to its own growth, Income and Growth has been a non-performer. The share price is down 11% over the past five years.

So why do I like it?

The answer lies in the other part of the trust’s name: income.

This trust has been a solid dividend payer for years. In those same five years, while the share price has fallen 11%, the company has paid 48p per share in dividends to shareholders.

That is equivalent to around 76% of the current share price.

I think the dividends could keep on coming

Still, as with any share, past performance is not necessarily an indication of what may happen in future.

So, while Income and Growth currently has a dividend yield of 9.5%, that does not automatically mean that £1,000 invested today will earn £95 of dividends next year.

However, I hold the share because I have confidence in its long-term potential when it comes to boosting my second income. The trust aims to pay at least 6p per share in dividends annually. That indeed equates to a 9.5% yield.

Over the past 13 years, the trust has met or exceeded that target every year.

For that to continue,  it needs to continue generating cash, whether through dividends from companies in which it has a stake or – more commonly – by selling a shareholding and generating cash.

Exposure to unlisted growth stories

It has been doing a good job of that over the years.

One risk I see at the moment, however, is that it is not a great market in which to be offloading shares in small companies at a good profit. Or, as the trust managers put it in their most recent annual report, the “exit environment remains subdued”.

Still, the trust managers have a good track record of buying into promising companies, holding them for a number of years, and then selling, sometimes at a substantial profit.

There are some duds, of course: that risk goes with the territory of investing in unlisted companies in their growth phase.

But overall, the approach has repeatedly proven to work, underwriting the substantial dividend from from Income and Growth.

That suits me fine, as it adds to my second income. My expectations for share price growth (if any) are modest, but from a dividend perspective, I like this share a lot and have no plans to sell it.

The post This share helps me earn a second income — and it sells for pennies appeared first on The Motley Fool UK.

I believe I could. It is not guaranteed, of course. But here is how I would go about it.

Long-term wealth creation tool

First things first. Let me explain the role of my Stocks and Shares ISA here. The ISA could help me build a retirement fund in a tax-effective way.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

I would be able to invest £20K each year in my ISA. That is a sizeable sum, but if I want to aim for a million I need to be willing to save and invest at a meaningful level.

My first move would be to decide which Stocks and Shares ISA seemed best-suited to my own needs. There are lots of different options to choose from.

Getting more back than I put in

Still, even if I put in my full £20K allowance annually for 20 years, that would give me £400K – far short of my target valuation.

I would hope to close the gap by putting the money in my ISA to work in the stock market. If I could growth my ISA value by a compound annual rate of 8.8%, my account would have a million pound valuation after 20 years.

How to aim for long-term growth

That might not sound like a challenging target. But remember, I am investing for the long term, through both good years and bad.

Still, I think it is achievable. It could be possible to hit that target through growth shares, income shares or a combination of both.

What matters in my view is that I buy into outstanding businesses that I think can produce outsized returns over time, thanks to strong commercial prospects and an attractive share price when I invest.

One share I hold

As an example, consider one of the shares I own in my ISA: investment trust Income and Growth (LSE: IGV).

Over the past five years, the share has fallen 10%. That may not sound like the stuff of investor dreams! But during that period, it has paid out 49.5p per share in dividends, which is around 70% of the present share price.

By investing in small and medium-sized companies and holding the shares while they (hopefully) grow, Income and Growth has been able to generate sizeable cash flows that have allowed it to pay juicy dividends. It targets at least 6p per year in dividends, around 8.5% of the current share price, but often pays more.

No company’s dividends are ever guaranteed and there is a risk that Income and Growth’s investments underperform, hurting cash flow.

But its proven management team and simple, lucrative strategy mean the share, currently yielding 15%, share has earned a place in my ISA.

The post Here’s how I’d start building a £1m ISA from scratch this September! appeared first on The Motley Fool UK.

Vodafone has announced plans to do that. The FTSE 100 telecoms giant has a yield of 10.6% now, but says it will halve the dividend from next year. If I want to turn my ISA into a passive income machine, just looking for high-yield shares seems like a misguided strategy. My focus would be on finding strong businesses with shares at an attractive price that I hope can maintain their yields.

Casting the net wide

To hit £2,290 of passive income next year, I would need to earn an average yield of 11.5% on a £20K Stocks and Shares ISA. That is far above the 3.7% yield of the FTSE 100, or 3.3% of the FTSE 250.

Still, some shares in those indexes come close. FTSE 100 member Phoenix yields 10.9%, while British American Tobacco and M&G are both on 9.7%. In the junior index, NextEnergy Solar Fund yields 10.8% and Ithaca Energy 25.3%!

Ithaca’s unusually high yield is an immediate red flag to me. It did not pay a dividend before last year and that year’s payout per share was almost double the basic earnings per share. A proposed deal to buy North Sea assets could help the company grow earnings, but an energy price crash is a key risk.

Clearly I do like some of these shares, though: British American Tobacco and M&G are both in my portfolio, as indeed is Vodafone despite the looming dividend cut.

The role of investment trusts

Some of those shares could help get me close to the 11.5% target yield. But they will not actually help me reach it.

However, I reckon I could bridge the gap owning some higher-yielding shares in investment trusts.

Consider as an example a share I own, Income and Growth Venture Capital Trust (LSE: IGV). Currently, its yield is 15%.

Will that last? Nobody knows, as with any dividend. The trust aims to pay a dividend per share of at least 6p annually, equivalent to a 9% yield at today’s share price. It has hit that goal in each of the past 12 years. Often, the trust has paid a higher dividend per share (11p last year, for example). It can be even higher: 2020 saw 14p a share.

Helping me hit the £2,290 target

By investing in early stage and growing companies for the long term, the investment trust has been able to earn money to help fund such dividends. That proven strategy continues to deliver, although it means earnings can vary significantly from one year to the next.

Another risk for the dividend outlook is a proposed merger with other investment trusts. It remains unclear what that might mean for the level of any future dividends.

Still, by owning a mixture of high yield blue-chip FTSE 100 companies and some investment trust shares in my ISA, I think I could hopefully hit my passive income target next year.

The post Here’s how I’d try to turn a £20K ISA into a high-yield machine producing £2,290 of passive income next year! appeared first on The Motley Fool UK.

Still, a 16% dividend yield sounds as if it may be too good to true. Even the best high-yield portfolios would struggle to deliver that sort of return regularly while investing in high-quality shares.

However, one London-listed investment trust currently has a 16% yield.

Is it sustainable – and ought I to invest?

Income generation potential

The entity in question (specifically it is a venture capital trust) is Income & Growth (LSE: IGV).

In terms of whether the dividend is sustainable at its current level, my feeling is… probably not on a consistent basis. In fact, the trust itself makes no bones about that.

It invests in a variety of small and medium-sized companies that it thinks can keep growing. That means it often holds on to its stake for many years before selling.

That fits well with my own long-term approach to investing. But it means that cash flows can move up and down a lot, meaning its ability to pay a certain level of dividend one year might not be the same in the following one.

But it does have the stated aim of paying an annual dividend of at least 6p per share. That equates to a 9% prospective dividend yield (if not greater) at the current share price.

Can the business strategy deliver?

While this year’s bumper 16% yield appeals to me, 9% would suit me just fine too.

But the 6p per share annual target is just that — a target. There is no guarantee the investment trust will meet it. All shares carry risks, so none is ever completely a ‘no-brainer’ in my opinion.

However, I think Income & Growth’s track record has proved that its business model of buying stakes in a range of small and medium-sized firms with promising commercial prospects can be a lucrative one.

Whether that continues to be the case will depend on how well the fund managers select new investments and manage their existing portfolio.

A weak economy can expose weak business models. Some businesses that might have been able to grow fast when money was plentiful and customer demand was riding high may struggle more in the current lacklustre financial environment. That could hurt profits at the trust.

Proven strategy

Set against that risk however, Income & Growth has experience of investing against an underwhelming economic backdrop.

Even for its 2020 financial year, when a lot of far larger companies cut or even cancelled their dividends, the small trust managed to pay out 14p per share in dividends, following up the next year with 9p per share.

I like the simple but proven strategy of Income & Growth.

I think it offers a potentially lucrative source of future dividends. With an eye on the passive income opportunity, if I had spare cash to invest I would be happy to add this investment trust to my portfolio.

The post 16% yield! Is this investment trust a no-brainer buy? appeared first on The Motley Fool UK.

But a 16% yield immediately raises a question in my mind. Is such a juicy payout sustainable? Or could it be a red flag that the City expects a dividend cut?

After all, dividends are never guaranteed and past performance is not necessarily an indication of what to expect in future.

Inconsistent dividends for a reason

Looking at a share’s dividend history is not a dependable guide to what may happen down the line. But it can still be helpful in understanding how a company thinks about dividends.

Take Income & Growth as an example. Last year, it paid 8p a share in dividends. That was lower than the previous year’s 9p a share that, in turn, was a marked fall from the 14p a share paid in 2020.

Then again, so far this year, the trust has already declared a dividend of 11p a share. That is close to one sixth of its current share price.

Such jumps in dividend size reflect the trust’s business model. It invests in early-stage and growing firms, sometimes for many years at a time. When it sells its stake in a business that has done well, that can give it some money to use in buying stakes in new companies, or paying dividends.

But the timing, scale and profitability of such sales are not predictable. That impacts the trust’s ability to pay dividends from one year to the next.

Aiming for a certain payout

Nonetheless, the high-yield share has been paying out substantial dividends year after year.

It aims to pay at least 6p a share in dividends annually. It has done that consistently over the past few years. Given the proven ability of the fund managers in selecting attractive young companies in which to invest, I am optimistic that the trust will be able to deliver on its dividend target.

That is not guaranteed, of course. In a challenging economy, small- and medium-sized firms can struggle to make money. That could hurt income for the trust and also reduce the price it might achieve when selling its stakes in such businesses.

Long-term, high-yield potential

But despite the risks, I think there is potential for the trust to keep performing well and deliver on its dividend target.

It may also exceed it, as it has already done this year. But even at 6p a share annually, the current share price suggests a prospective yield of over 8%.

I find that attractive and would consider buying the shares for my portfolio on that basis. But I reckon that, taken over the long term, the trust could pay out higher dividends. So buying it at the current share price could help me earn a high yield in years to come.

If I had spare cash to invest today, I would be happy to add the shares to my portfolio.

The post 16% a year! Is this high-yield investment trust too good to be true? appeared first on The Motley Fool UK.

Not only that, two of them are blue-chip FTSE 100 names.

Vodafone

The first of those FTSE 100 shares is Vodafone (LSE: VOD).

Vodafone shares are not as cheap as they were a couple of months back. But they still look like good value to me and offer a 10.2% dividend yield.

I doubt the dividend will be raised any time soon – it has been held flat since a cut back in 2019. But even if it is simply maintained at its current level, that yield looks attractive to me.

How likely is that to happen?

The firm does have a large debt pile, although last year saw it reducing that substantially. Meanwhile, a strong position in lots of European and African markets, resilient demand, and a massive customer base all work to the company’s advantage, in my view.

M&G

The asset manager M&G (LSE: MNG) is another FTSE 100 member with a double-digit dividend yield.

Like Vodafone, that currently stands at 10.2%. But, unlike Vodafone, the financial services provider has a recent record of increasing its annual dividend. Last year saw the dividend grow 7%. This year saw the interim payout increase 5%.

M&G has a well-established brand and millions of clients spread across more than two dozen markets.

I think the business is well-positioned to capitalise on strong demand for asset management. However, I do see a risk that could change if there is a severe recession and customers start pulling funds from the market.

But over the long term, I think the proven business should be able to generate sizeable cash flows. That gives it a lot of dividend potential, which is why it is on my list of shares to buy in November.

Income & Growth

My third choice is a share that has been on my radar for quite a while already: Income & Growth Venture Capital Trust (LSE: IGV).

The shares fell after a recent sizeable dividend payment. I think the current price offers me an attractive buying opportunity.

Dividends are the main attraction for me here – and they are sizeable!

The current yield is a whopping 16.1%. That may well not be sustained, as the payout moves around based on how much cash the trust generates from its portfolio of investments in small and medium-sized enterprises.

In a weak economy, such companies could face challenges. That may lead to a dividend cut from Income & Growth.

While payouts are never guaranteed, the trust currently aims to pay at least 6p per share in annual dividends. Given that the share price is under 70p at the moment, that still looks generous to me.

The post 3 shares to buy in November for 10%+ dividends appeared first on The Motley Fool UK.

Altria

US tobacco giant Altria (NYSE: MO) recently announced yet another increase in its annual dividend. That means the Dividend Aristocrat now has a continuous run of annual increases stretching back over half a century.

With famous brands such as Marlboro in its US portfolio, the company is a free cash flow machine. It has been good at using those flows to reward shareholders in the form of dividends.

The shares currently yield 8.8%. While dividends are never guaranteed, I expect the company will try to extend its long run of annual increases in years to come.

What could go wrong? One obvious risk is the declining popularity of smoking cigarettes in the company’s key markets.

Altria has been less impressive than some rivals in finding promising new revenue streams. For now, I think the cigarette business looks set to continue generating big profits. But I will be keeping an eye on how Altria reshapes its non-cigarette portfolio in the coming years.

Income & Growth

Income & Growth VCT (LSE: IGV) is a venture capital trust that invests in up-and-coming businesses. It then often holds its stake for years, hoping to sell at a profit. That strategy has worked well for years — and allowed the trust to make generous dividend payments.

The yield currently stands at 11.3%. But an important factor to understand when it comes to Income & Growth shares is that the dividend tends to move around quite a bit.

The trust aims to pay a dividend of at least 6p per share each year (although, like all dividends, this is never guaranteed).

Its interim dividend alone this year was 4p per share, so I expect the full-year payout to be higher than 6p. Given that the shares currently trade for about 71p each, I think it means this could be a very rewarding dividend stock to add into my portfolio.

How the trust performs in coming years will depend on the performance of its underlying investments. One risk I see is that a challenging economy makes it harder for young companies to grow. That could mean Income & Growth holds onto its stakes for longer, reducing the flow of funds available to pay dividends.

As a long-term investor though, I am already used to taking the long view. So an ebb and flow of dividends from Income & Growth would be fine by me if, overall, owning the share offered me a substantial passive income opportunity in years to come.

The post 2 dividend stocks I’m eyeing for September appeared first on The Motley Fool UK.

Having said that, I think it can help focus the mind to consider what I would do if I wanted to invest in only dividend share in the coming month.

For example, although I recently bought Vodafone, its debt level means I still see a risk of a dividend cut at some point. So if I had spare money to invest in August, but only enough to invest in one share, it would not be that one.

Diversified holding

Instead of investing in a single business, I would buy shares in a pooled investment vehicle that would give me access to a diversified range of holdings.

Specifically, I would invest in the venture capital trust Income and Growth (LSE: IGV). Lately, it has been trading close to its 52-week low price, offering me an attractive entry point at the moment.

As dividend shares go, it is a particularly juicy one when it comes to yield. Right now, the yield is 11%.

Things could get even better at some point. Whereas the dividend per share last year was 8p, in 2020 it was 14p. If the payout returns to that sort of level, the prospective yield at the current share price could be a mouth-watering 19%.

Variable dividend

But there is no guarantee that will happen. In fact, there is no guarantee the dividend will even be maintained at its current level. The trust aims to pay at least 6p per share in dividends annually. Again, there is no guarantee that will happen (although it has for the past 11 years in a row).

Whether a company can consistently pay dividends at a given level depends on its business performance. The current high yield at Income & Growth may suggest that some investors are wary about its future dividend prospects and valuing the shares accordingly.

Challenging market

The main risk I see to the dividend is Income & Growth’s business model colliding with a challenging economy.

The trust invests in small and medium companies like Virgin Wines and MyTutor, hoping to benefit from their growth. To do that, it usually ends up selling its stake – but that could take many years.

After raising more funds last year, the trust has liquidity it can use to support businesses in which it has invested even as they navigate choppy economic waters. That could mean fewer stake sales in coming years, generating less money to fund dividends.

Why I’d buy

Even if that happens and the yield on this dividend share falls, I would not necessarily see it negatively.

If the trust has invested in promising companies and supports them, over time, some of its stakes ought to grow in value. Even if that gain is not realised yet to be paid out as dividends, it could help boost the value of Income & Growth shares over the course of time.

With a track record of investing in some excellent young companies that go on to prosper, I would happily hold Income & Growth in my portfolio.

The post If I could buy just one dividend share in August, I’d choose this one appeared first on The Motley Fool UK.

[Just beginning your investing journey? Check out our guide on how to start investing in the UK.]

Barclays

What it does: Barclays is a British universal bank, headquartered in London, with operations around the world.

By Dr James Fox. Today, Barclays (LSE:BARC) offers a 4.7% yield. That’s not world-beating, but it’s above the index average. So, why is Barclays my best dividend stock for July? Well, it’s because of the forward dividend yield.

In 2022, the bank’s dividend was covered 4.25 times. That’s far better than what we normally consider safe. And this also means, thanks to continued strong performance in Q1, there is room to grow the dividend.

As such, analysts’ forecasts suggest the company will pay a dividend of 8.6p per share in 2023, and 9.7p per share in 2024, up from 7.25p in 2022 and 6p in 2021. These forecasts would represent a forward yield of 5.7% and 6.4% for 2023 and 2024 respectively.

My biggest concern is near the term impact of more rate rises – higher impairment charges – but in the medium term, when rates moderate, things look a lot brighter.

James Fox owns shares in Barclays.

Income & Growth

What it does: Income & Growth is a venture capital trust that invests in small and medium enterprises with growth potential

By Christopher Ruane. The Income & Growth (LSE: IGV) venture capital trust said this month that it intends to keep targeting an annual payout of 6p per share. It has paid at least this every year for over a decade. Last year’s dividend was 8p per share.

For a share that has been trading close to 70p lately, that means that the prospective yield should be around 8.6%, but could be higher. The interim payout this year of 4p suggests the trust is potentially in line to match last year’s full-year dividend of 8p per share.

Income & Growth has proven its approach over many years. There are risks, of course: an economic slowdown could hurt profitability at young companies, meaning the trust’s own income falls.

As a long-term investor, though, I think the approach of investing in carefully selected young companies could continue to work well for Income & Growth. That could fund more big dividends in future.

Christopher Ruane does not own shares in Income & Growth.

M&G

What it does: M&G is in the savings and investments business, providing savings and asset management services to individuals.

By Alan Oscroft. M&G (LSE:MNG) stock has climbed up the dividend table in 2023, as inflation and interest rates hit investors in the pocket.

When there’s less cash to invest, investment firms like M&G will suffer, so their shares are worth less. That’s the reasoning, and it’s helped push M&G shares down.

Well, the fall actually hasn’t been too bad, with the price down 16% since the firm was spun out from Prudential in 2019.

But it has helped push the forecast dividend yield up to 10% now, one of the biggest in the FTSE 100 at the moment.

The main risk I see is that forecasts tend to lag reality, and we might not get that yield. Any pressure on profits could mean less cash for dividends.

But with a long-term view, I see the investment business as a cash cow. And if we buy shares when they’re weak, we can lock in higher yields.

Alan Oscroft does not own M&G or Prudential shares.

The PRS REIT 

What it does: The PRS REIT is a real estate investment trust that recently built its 5,000th private rental home. 

By Royston Wild. Investing in property stocks can be an effective way for individuals to protect their wealth in inflationary times. These sorts of companies can often introduce weighty rent hike to offset rising costs and thus protect profits. 

With inflation remaining sticky in the UK, I believe The PRS REIT (LSE:PRSR) could be a top dividend stock to buy for July. It’s already benefitting from the rental market’s deteriorating demand and supply imbalance and is raising rates accordingly. Like-for-like rents on stabilised sites increased 5.7% here during the six months to March.  

Rent growth is actually accelerating across the market as mortgage costs rise and the market’s supply crunch worsens. Latest Office for National Statistics data showed private rents increase 5% in May. This was the highest annual change since records began in 2016. 

Today PRS carries a healthy 5.1% dividend yield for the new financial year beginning in July. High build cost inflation remains a danger to profits, but signs of moderation here are encouraging.  

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. 

Royston Wild does not own shares in The PRS REIT. 

The post Best British dividend stocks to buy in July appeared first on The Motley Fool UK.